Wamu Policing Slammed; Levin Blames OTS Execs
Adler, Joe, American Banker
Byline: Joe Adler
WASHINGTON - The Office of Thrift Supervision was more focused on blocking the Federal Deposit Insurance Corp. from reining in Washington Mutual Inc. than it was in regulating the thrift company itself, congressional investigators and two watchdogs said Thursday.
A day before officials representing both agencies are scheduled to answer for the biggest failure in U.S. history, Sen. Carl Levin released a scathing report on Wamu's oversight, asserting that the OTS viewed the Seattle company as a "constituent," repeatedly ignored its own examiners' findings about Wamu's risky strategy and responded to the FDIC's more aggressive tone by fighting a turf war.
"Bank regulators are supposed to be our first line of defense against unsafe and unsound banking practices, but OTS didn't defend us," the Michigan Democrat told reporters ahead of Friday's hearing of the Permanent Subcommittee on Investigations. "Instead, although OTS repeatedly identified serious problems with Wamu, it failed to act based on the problems that it itself saw. These agencies, in particular the OTS, are supposed to be like a fire inspector to protect us... but instead stood and watched idly while the incendiary threat grew higher and higher."
Ahead of the hearing, Levin released a raft of documents, including internal FDIC and OTS memos that documented their arguments during Wamu's final days. Earlier this week, Levin also released internal Wamu documents detailing the company's risky lending practices and held a contentious hearing with former Wamu Chief Executive Kerry Killinger.
Similarly critical findings were released Thursday by the inspectors general of the FDIC and Treasury Department; a joint report concluded both regulators could have done more. "OTS's examinations of Wamu identified concerns with Wamu's high-risk lending strategy, including repeat findings concerning Wamu's single-family loan underwriting, management weaknesses and inadequate internal controls," the watchdog agencies said. "However, OTS's supervision did not adequately ensure that Wamu corrected those problems early enough to prevent a failure of the institution."
While the scrutiny has put both regulators in the hot seat, Levin's criticism was more squarely directed at the OTS. He noted the FDIC's numerous attempts to downgrade Wamu's regulatory rating.
According to his report, the FDIC was so frustrated by the OTS' refusal to downgrade the company's Camels rating in the summer of 2008 -months before its September failure - that the FDIC informed Wamu directly that it would lower the rating. (Regulators usually agree on ratings, but the FDIC is allowed to assign its own rating for deposit insurance assessment and other purposes.)
In response, then-OTS Director John Reich complained about FDIC Chairman Sheila Bair to his deputy, Scott Polakoff, writing in a Sept. 10, 2008, e-mail, "I cannot believe the continuing audacity of this woman."
Levin also pointed to repeated OTS efforts to block FDIC examiners from participating in Wamu's oversight. In a 2006 e-mail, FDIC Regional Director George Doerr told a senior official at the agency, "Please read info about OTS denying us space and access to information. The situation has gone from bad to worse."
Levin said that the OTS "did not allow the FDIC examiners to access critical ... documents, refused to permit the FDIC to participate on a file review" and "continually rebuffed the FDIC's more critical view of the bank's condition. …